In short, the answer to the question is an overwhelming yes, but the question itself suggests an assumed, implicit tension between profit maximization and the pursuit of other social responsibilities, which perhaps is a bit shortsighted.
When viewed from a longer-term perspective, profit maximization can be achieved solely through a broad, community-based collaboration between a business and all of the prominent constituent groups, called stakeholders that play a major role in determining business success and profitability. Stakeholders are defined broadly, including employees, customers, owners (stock-holders), citizens in general, local, state, and federal governments, and sometimes even competitors. Anyone who has a stake or interest in the success or failure of a business is a stakeholder. In the long-term, business success creates jobs, provides goods and services, fills tax coffers, and adds to the stability of any community or region. It is in the best interest of almost all stakeholders for businesses to succeed over time and maintain competitive profitability to attract continued investment.
Early in the industrialization of the American economy, Henry Ford learned first-hand the importance of thinking broadly about business success and profit maximization. Facing increasing worker turnover due to the monotony of his innovative assembly line manufacturing methods, Ford made a bold and controversial gamble of doubling the wages of his disgruntled workers and shortening the work day from nine hours to eight.
At first glance, Ford’s decision to pay his workers more wages to work fewer hours sounds like a crazy way to maximize profits, but in reality his insightful strategy cemented his place in business history because the strategy paid off in spades. Think of the impact of this decision on all of Ford’s many stakeholders.
First, his employees were grateful and returned his goodwill with loyalty to the company and devotion by doing great, high quality work. Worker productivity soared, and training costs were reduced dramatically since experienced workers stayed with the company. Interestingly, all of his workers also became his customers, since on the new pay-scale his workers could now afford the product which they produced. Word spread of the higher wages paid by Ford, and new workers flocked to his company when he opened a second and then a third shift utilizing his large capital investment 24 hours a day.
Second, his customers also were amazed by the improvements in technology and product features which he introduced into the automobile marketplace. It seemed impossibility that Ford could simultaneously improve quality and product features while lowering the purchase price. Customer loyalty increased, and business increased through word of mouth advertising.
In addition, Ford won praise from community and governmental leaders for the enlightened approach he used to work cooperatively with workers at a time when labor unions were gaining power due to abusive practices of low wages and long hours at other business organizations. In short, the Ford example suggests that long-term profit maximization is most likely achieved when business practices consider the interests of all stakeholders.
Since this logic seems so obvious, it begs the question, why don’t business managers always work to maximize profits by considering the interests of all stakeholders? The answer is that business managers aren’t always rewarded for maximizing long-term profitability. Unfortunately, it is often the case that managers of publicly owned businesses are evaluated by the stock price of the company, which can vary dramatically and is especially sensitive to short-term business profitability. Consequently, many managers make decisions which improve profits in the short term, driving up the stock price and individual managerial compensation, while simultaneously hurting the long-term prospects of the business. Short-term profit maximization tends to focus on only a single stakeholder, the stockholders, and does not typically include considerations of social responsibility.
We, the public, can influence the behavior of business managers by asking them to manage for the long run, rather than for short-term profitability. We do this by investing in and purchasing products from companies that are socially responsible and that are managed for the long term. The last decade has seen a dramatic shift in socially responsible investing and purchasing. Customers are voting with their pocketbooks for companies and products that exhibit socially responsible characteristics.
Coming full circle, we are back to the initial question, “Do businesses have social responsibilities to the communities they plant in beyond maximizing profits?” The answer is still a resounding yes, and gratefully today we are witnessing a dramatic recognition by customers and investors that they can influence business managers to be socially responsible while sustaining long-term profitability.
By Bruce C. Raymond, Dean, Hasan School of Business — Colorado State University-Pueblo